This Day On The Street
Continue to site
ADVERTISEMENT
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here

5 Stocks With Safe, High Dividend Yields

The following commentary comes from an independent investor or market observer as part of TheStreet's guest contributor program, which is separate from the company's news coverage.

NEW YORK ( TheStreet) -- An interesting aspect of Joel Greenblatt's Magic Formula Investing (MFI) strategy is that its precepts can be applied to a variety of other stock strategies and focuses. For example, if you like to invest in small caps, MFI can be used to find good, undervalued businesses in a sector that is under-followed by professional equity analysts. If you are looking to invest in foreign markets, MFI can be applied to stocks in foreign exchanges, and so forth.

We can also go the other way, and apply additional criteria to stocks in the official MFI universe. In theory, doing this starts us with a list of good, undervalued companies, weeding out a lot of junk from the beginning. This article will focus on combing through the three screens covered by MagicDiligence (top 50 over $50 million and $1 billion, top 30 over $3 billion), looking for MFI stocks with relatively safe dividend yields above 3.5%, providing ongoing income for investors:

1. Altria Group (MO - Get Report)

Forward Dividend Yield: 5.7%

Free Cash Flow Payout Ratio: 115%

Consecutive Years of Dividend Hikes: 43

Magic Formula Earnings Yield: 9.1%

Magic Formula Return on Capital: 44.3%

Altria Group is the largest tobacco company in the U.S., producing the No. 1 brand of cigarette (Marlboro), and the No. 1 brand of smokeless tobacco (Copenhagen).

Competitive dynamics are strong, as oppressive government regulation in the U.S. shuts out new competitors and hurts discount labels more than premium brands, and the firm produces copious amounts of free cash flow. Altria is a "dividend aristocrat," raising the dividend for 43 consecutive years. Recently, though, dividend payments have begun to outstrip free cash flow, so this is something to watch. Competitors Reynolds American (RAI) and Lorillard (LO) are also Magic Formula stocks and also interesting dividend investments.

2. Eli Lilly (LLY - Get Report)

Forward Dividend Yield: 5.3%

Free Cash Flow Payout Ratio: 36%

Consecutive Years of Dividend Hikes: 42 before being broken in 2010

Magic Formula Earnings Yield: 16.0%

Magic Formula Return on Capital: 54.1%

One of the largest pharmaceutical makers in the world, with products like Cymbalta for depression and antipsychotic Zyprexa. The payout ratio is modest and Lilly has a stellar dividend record. Some concerns are a high debt load after purchasing ImClone in 2008 and a large patent cliff in the next 2 years (over 40% of sales). A decent pipeline of new drugs and cost cutting will be key in maintaining and raising the dividend, and the payout ratio is safe for now. At a 16% earnings yield, there is also significant capital appreciation potential if the R&D pipeline can deliver. Like tobacco, branded pharmaceuticals have an outstanding long-term investment record.
1 of 2

Check Out Our Best Services for Investors

Action Alerts PLUS

Portfolio Manager Jim Cramer and Director of Research Jack Mohr reveal their investment tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
Quant Ratings

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
Stocks Under $10

David Peltier uncovers low dollar stocks with serious upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
14-Days Free
Only $9.95
14-Days Free
Dividend Stock Advisor

David Peltier identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Updates with exact steps to take - BUY, HOLD, SELL
Trifecta Stocks

Every recommendation goes through 3 layers of intense scrutiny—quantitative, fundamental and technical analysis—to maximize profit potential and minimize risk.

Product Features:
  • Model Portfolio
  • Intra Day Trade alerts
  • Access to Quant Ratings
Options Profits

Our options trading pros provide over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • Actionable options commentary and news
  • Real-time trading community
SYM TRADE IT LAST %CHG
MO $49.10 0.39%
MNDO $2.63 1.15%
LMT $188.17 1.22%
LLY $84.85 1.63%
UNTD $15.43 -1.53%

Markets

DOW 17,757.91 +138.40 0.79%
S&P 500 2,077.42 +14.31 0.69%
NASDAQ 5,013.1230 +26.2560 0.53%

Free Reports

Top Rated Stocks Top Rated Funds Top Rated ETFs